Value Scores Fall Out Of Favor

9/28/2015


Investors have lost their appetite for undervalued but risky stocks. Instead they prize companies with established track records for growth, strong operating momentum in recent quarters, and rising profit estimates.

Among the six Quadrix categories, the Value score has worked best for stocks of all sizes over the past 10 years and since December 1994, when our data for the S&P 1500 Index begins. To measure effectiveness, we considered how stocks in the top quintile for a given Quadrix score (generally above 80) went on to perform over the next 12 months, relative to the average stock in their index.

Based on this analysis of rolling 12-month returns, stocks in the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes with high Value scores outperformed the average stock in their index by an average of at least 2.5% since December 1994, as shown below.

NEW CATEGORY LEADERS EMERGE IN QUADRIX
The Value score has worked best in Quadrix over the long run, though Momentum, Quality and Earnings Estimates scores have been more effective recently. For example: In the past year (12 rolling 12-month periods), S&P 500 stocks scoring in the top quintile for Quality (generally above 80) went on to outperform the average stock in the index by an average of 3.0%, well above the score's 0.2% outperformance since 1994.
--------------- Average Outperformance for Top Quadrix Scorers ---------------
Index
Time Periods Tested
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
S&P 500 (large-cap)
Since December 1994 *
0.5
3.2
0.2
0.1
0.2
1.0
2.3
Last 10 Years
(120 periods)
(0.7)
1.9
(0.7)
(1.1)
0.0
(1.4)
(0.3)
Last 1 Year
(12 periods)
0.5
(4.3)
3.0
(3.1)
1.2
(1.7)
(0.7)
8/29/2014 (1 period)
6.6
(5.5)
1.1
(5.9)
9.4
(2.9)
(2.0)
S&P MidCap 400
Since December 1994 *
1.8
2.5
1.6
(0.8)
0.3
0.7
3.3
Last 10 Years
(120 periods)
0.6
1.7
1.2
(1.8)
0.2
(2.3)
1.5
Last 1 Year
(12 periods)
2.7
(0.2)
4.4
(1.3)
2.0
(1.0)
4.3
8/29/2014 (1 period)
0.6
(0.8)
8.3
0.4
5.0
(2.2)
2.0
S&P SmallCap 600
Since December 1994 *
(0.2)
2.6
(0.3)
(1.5)
0.0
(1.3)
1.5
Last 10 Years
(120 periods)
(0.4)
1.3
(0.7)
(2.7)
(0.3)
(2.6)
(0.7)
Last 1 Year
(12 periods)
2.8
(0.5)
1.7
(1.3)
2.1
(3.1)
0.5
8/29/2014 (1 period)
0.0
(3.1)
10.2
5.2
4.1
0.1
0.3
* December 1994 for all categories except Earnings Estimates, which was introduced in February 2004. 

But no investment strategy can work all the time, and Value has performed poorly since November 2013. Three other categories have proved more effective: Momentum, Quality, and Earnings Estimates.

In particular, Quality tends to work when Value falters. Among S&P 500 stocks, the Value score has underperformed in 11 consecutive 12-month periods. It experienced similar prolonged downturns during the technology bubble from 1998 to 2000 and during the run-up to the financial crisis that came to a head in 2008. Value stocks also lagged from 2010 to 2012. Top Quality scorers outperformed the average stock during each of these periods.

The latest shift in strategy signals investors are bidding up shares of companies that seem capable of expanding during a time of slow growth in the U.S. and elsewhere. We understand the appeal of growth but urge investors to avoid the temptation to overpay for it.

Instead, try to identify stocks with favorable growth prospects that remain attractively valued. After all, even the best company can become a bad investment if bought at too high a price.


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